What Are REITs and How do They Work?

Real Estate Investment Trust (REIT) is a financial asset that is quoted in the same way as a stock, which allows an investor to have exposure to the real estate sector of the US economy.

In other words, if we buy shares of a REIT we are investing indirectly in houses, apartments, hotels, office buildings, etc.

Unlike direct investment in real estate, which has a liquidity problem, a REIT provides liquidity, because we can buy and sell our shares at any time in the open market.

REITs are exempt from federal taxes at the company level.

To maintain its Tax Free status, the REIT must distribute 90% of the profits every year in the form of dividends among the shareholders.

In addition, experts from the title insurance agency Riverside Abstract LLC, explain how do the REITs work more deeply.

Invest and Become Rich in the Stock Market

For these reasons, investors who wish to have assets that generate cash flow, having a REIT in their investment portfolio is a good choice.

All REITs must have at least 100 shareholders.

75% of the assets of the REIT must be invested in real estate, cash or U.S. Treasury bonds.

75% of the income must come from real estate.

Types of REIT

According to the info we got from Riverside Abstract professionals, in the USA there are mainly three types of REIT:

Equity REIT

They invest in the construction or purchase of real estate.

Your income is derived from renting the properties to the tenants.

The collected income is distributed in the form of dividends among the shareholders.

When the REIT sells a property with capital gain, this gain must be distributed in the form of dividends.

Mortgage REIT

They invest in the purchase of mortgages.

These REITs lend money for the purchase of real estate or can buy the loans through the acquisition of financial assets called Mortgage Back Securities (MBS).

The profits from this type of REIT come from the difference between the net interest received from the loans and the cost of raising the funds.

Hybrid REIT

These invest in properties and mortgages.

From the title insurance agency, Riverside points out that investors can invest in REIT in three ways:
  • Buying shares directly in the open market;
  • Buying shares in mutual funds specializing in real estate;
  • Buying shares in ETF specialized in REIT.

Some REITs are public and are registered with the SEC while others are totally private. From 2010 to 2015, REITs of different types have generated an annual return between 12–20%. While most REITs pay dividends every four months, some do it monthly.

Here are the Riverside Abstract’s favorite REITs

American Capital Agency Corporation (AGNC) is a REIT that invests in MBS. It has a return of 12.59% in dividends.

Apple Hospitality REIT (APLE) specializes in hotels. It has a yield of 6.17% in dividends.

Blue Rock Residential Growth (BRG) specializes in residential multifamily. It has a 9.6% return on dividends.

Conclusion

If you have not invested in real estate because you can’t deal with the administration of the property, the search for tenants and the lack of liquidity, the REITs are the solution to all these real estate management problems.

The professionals from Riverside Abstract advise that a well-balanced investment portfolio should include REIT. An important reason is that REITs are not in correlation with the shares.

What does this mean?

On a regular basis, when the shares fall, the REITs go up and vice versa.

Location: Brooklyn, NY, USA

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